The bond market is waiting for Federal Reserve officials to reveal how high they think interest rates will go. The reaction to that forecast will also have a profound effect on equities, which are struggling as interest rates rise in anticipation of a more aggressive Fed. The Fed’s latest forecast for end-of-term interest rates — or the high interest rate mark — will be published in its quarterly economic projections released at 2 p.m. ET Wednesday. That’s when the Fed is expected to announce that it will raise its target deposit rate by 75 basis points, despite some speculation that it could move as much as a full percentage point. (One basis point equals 0.01%) Besides the rate hike, the market is paying close attention to the closing rate. That forecast is included in the Fed’s rate forecast. Currently, the Fed has a closing rate of around 3.8% for 2023, based on projections in June. Those forecasts are shaped by the joint estimates of Fed officials, who spoke on condition of anonymity. . On Tuesday, futures markets were pricing in at 4.5% next April, but economists differ widely on where the Fed’s rate campaign could peak. Some expect it to be closer to a 4% ending rate, while others expect it to be as high as 5%. With a three-quarter point increase on Wednesday, the lending rate range will increase from 3% to 3.25%. “If we see that 4.25% is the bottom line of the lending rate, I think investors will breathe a sigh of relief because it could be,” said Sam Stovall, chief investment strategist at CFRA. much worse. Base rates have been in the spotlight for investors, especially since a report on August consumer inflation that was hotter than expected dampened sentiment on how positive it is. of the Fed. That report sent bond yields soaring, and that hurt stocks, in turn. The consumer price index shows inflation continued to rise in August, while economists expect it to ease slightly. The yield on the 10-year Treasury note was at 3.55% Tuesday afternoon, after touching a high of 3.6%. The 2-year yield was at 3.96%, after peaking at 4%. The Fed’s end-of-term interest rate expectations also spiked. Before the August CPI report, the futures market was valuing the closing rate of only about 4% for next April. As rates spike, stocks have fallen since the September 13 report. “If you can call this the Fed dance, the bond market is leading. “The Fed is the rhythm of the music. If the Fed seems more aggressive, they’ll speed things up and that could throw the market and the economy off track.” Yields on both 2- and 10-year bonds fell after the Fed’s three most recent rate hikes – in May, June and July – according to Wells Fargo’s Michael Schumacher. At the March meeting, where the Fed first raised interest rates from zero, yields rose slightly. Yields are the opposite of price and lower yields are considered better for stocks. According to data from Bespoke, stocks have moved higher after every Fed rate hike this year, since March, when the Fed raised rates for the first time. “I think bonds are driving stocks right now,” Schumacher said. He pointed to the spike in bond yields following the hot CPI report. In the futures market, “the closing rate was up 40 basis points in 24 hours,” he said. “Stocks just dropped in price.” Higher for longer Schumacher said Powell is likely to stress that the Fed will keep rates higher for longer and not reverse course by cutting rates late next year, as some in the expected market. That’s important because higher in the long run means the economy will face interest rates at the bottom for longer, not the lower yields many people expect. Schumacher said there was also a risk of Powell leaning towards the dovish side, by presenting scenarios where the Fed could slow rate hikes. “Fed will make it clear… that we’re going into phase 4 [on fed funds] and there. “And whether they think they need much slower growth or will need more, do,” said Robert Tipp, chief investment strategist at PGIM Fixed Income. [they] Strategists say the Fed may forecast an eventual rate, but that rate will likely not end the cycle because the outlook for inflation and the economy is unclear. The final rate may be higher or lower. Tipp said there’s about a 50% chance the Fed will never raise rates above 4% because of the economic slowdown looming in the housing market. the 10-year benchmark yield, which affects mortgages, auto loans, and other loan rates. “We expect 10-year yields to end lower,” said Ian Lyngen, head of US rate strategy at BMO. “I think the market is falling vous the Fed feels behind the curve, they’re going to do something outside the area,” he said. But NatWest Markets expects the Fed to actually have a closing rate of 5%. John Briggs of NatWest said: “I think there is some recognition that rates are going to have to go higher than we thought and stay there longer than we thought. “What if inflation goes higher? … A 10-year yield at 4% isn’t crazy.”